BRIEF FACTS OF THE CASE
- The Petitioner being a real estate developer entered into an agreement with the land owner for development of plot on 7 April 2022.
- As per the agreement, the petitioner was required to develop the land into a multi-storied complex in consideration of INR 7 Crores along with two apartments in the constructed building.
- It is pertinent to note that in the instant case, the petitioner did not purchase or acquire any Transferable Development Rights (TDR) or Floor Space Index (FSI) from any external authority or third party. Instead, the development activities were carried out solely based on the rights conferred under the agreement with the landowner.
- The Petitioner was issued a show cause notice followed by a demand notice asserting that the development agreement involved a taxable transfer of development rights or FSI, and hence was alleged to be taxable under reverse charge in terms of Entry 5B of Notification No. 13/2017 Central Tax (Rate).
- The key issued under consideration before the Hon'ble Bombay High Court was the applicability of Entry 5B of the Notification No. 13/2017 Central Tax (Rate) dated 28 June 2017 (as amended) on the rights derived by the Petitioner from the landowner under the Agreement of sale to construct in lieu of the consideration or constructed units to the landowner.
KEY OBSERVATIONS OF THE HON'BLE BOMBAY HIGH COURT
- The Divisional Bench of Hon'ble High Court while examining the scope and applicability of Entry 5B of Notification No. 13/2017 Central Tax (Rate) observed that given entry is specifically worded to apply only when a person supplies services by way of supply of TDR/ FSI for construction of a project by a promoter, including additional FSI. The expression ‘Transfer of development rights' is a defined concept, especially under urban development regulations in Maharashtra, and usually refer to benefits such as transferable development rights granted by a planning authority, often in exchange for relinquished land or compliance with certain planning conditions.
- In the factual matrix of the Petitioner, the Hon'ble Court observed that the development rights obtained by the Petitioner from the landowner are not derived from any such statutory or regulatory authority as required under the urban development regulations. Hence, the Petition has simply used the available development potential of the plot, which does not amount to a ‘transfer' as contemplated under Entry 5B.
- On the reliance of clause 18 of the development agreement by the Respondent(s), which referred to executing a declaration under the Maharashtra Apartment Ownership Act, the Hon'ble Court observed that the said clause merely mandates the compliance (under the said act) and does not indicate a transfer of TDR or FSI.
AURTUS COMMENTS
- The taxability of transfer of development rights under the joint development agreement has always been a matter of litigation, dating back to erstwhile service tax regime. The primary contention has been that such rights represent benefits arising out of land, thereby qualifying as immovable property and falling outside the purview of service tax. In the GST regime, the scope of a service is wide enough to cover transfer of all rights connected to an immovable property and an exclusion from the levy is only provided to sale of land and building. Thus, unlike service tax where development rights in a land have been interpreted to mean akin to transfer of property in an immovable property, GST takes a much narrower approach on the exclusions that can be covered under the phrase ‘sale of land and building'. Following this interpretation, the Telangana High Court in M/s Prahitha Constructions Private Limited vs. Union of India [WP No. 5493 of 2020] has held that the transfer of development rights is eligible to GST, which in turn also has been affirmed by the Supreme Court in Special Leave to Appeal (C) No(s). 11079/2024.
- Per contra, the instant ruling of the Bombay High Court creates a distinction between the transfer of development rights by the Landowner and the planning or the government authority. However, given the contradiction, the position will further be subject to scrutiny by the Supreme Court and hence, reliance on this ruling for non-payment of GST, especially in case of commercial properties, should only be taken after a thorough evaluation of tax costs involved in the supply chain.
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